Because Mainstream Personal Finance Advice Is Not What It Should Be

Last Wednesday brought us details of the administration’s plan to help homeowners hurt by the housing and credit crises. In the days that followed, we got a tidal wave of commentary from the mainstream media and blogosphere.

For those of you able to block the whole thing out, I’ll recap. The plan is really two separate schemes, the Home Affordable Refinance program and the Home Affordable Modification program. (Congrats to the Treasury for avoiding calling them together the Home Affordable Refinance and Modification program, whose unfortunate acronym, HARM, would have been fodder for clowns like me. They also get points for being so Orwellian with a straight face. The avowed goal of the Home Affordable programs is to support house prices, making them less affordable.)

The refinance program is relatively simple. If you a) owe less than $729,750 b) have a mortgage owned by Fannie Mae or Freddie Mac c) have a loan to value ratio of between 80% and 105% and d) are otherwise creditworthy, Fannie/Freddie will allow you to refinance at current rates. In other words, you get a pass on not having enough equity in the house, which is not that huge a concession given that you already owe the money to Fannie/Freddie.

Reaction to this half of the Grand Scheme can be described as largely polite. The Baglady did pointedly argue that it is a non-event, as Fannie/Freddie have been looking the other way on equity levels for a while, performing “streamlined” refinances that skip the tedious appraisal step. But most blogs (e.g. No Credit Needed and Gather Little by Little) and news accounts (Wall Street Journal and NY Daily News) just passed along the plan outline without comment.

But it deserved comment. The administration seems to be working way too hard to pad out the numbers of people that will be helped by their housing schemes. The headline in the WSJ read “Mortgage Bailout to Aid 1 in 9 U.S. Homeowners.” The Treasury’s Summary of Guidelines hedged that considerably, saying that the plans “will offer assistance to as many as 7 to 9 million homeowners.” Of those 7 to 9 million, more than half, 4 to 5 million, will have the refinance program made available to them. Even accepting the qualification that we are talking about the number of homeowners eligible, rather than those that will be helped, 4 to 5 million seems high.

But it is the other half of the plan, the Home Affordable Modification program, that is the main event. It is here that the government plans to spend the $75 billion earmarked for fixing housing. (The refinance plan is, apparently, considered to be free to the taxpayer, as costs will be borne by Fannie/Freddie, who are merely government controlled, not government owned.)

Mechanics of the modification plan are remarkably complex and not worth repeating here. (The very patient and curious can read this slowly.) Bottom line is that the Treasury will subsidize the costs of modifying the terms of certain mortgages that are in trouble but not hopeless. Reactions were mixed.

(In a related development, last week Rick Santelli posted on CNBC.com that his now classic rant was spontaneous, and not coordinated with what the New York Times termed “right-wing groups.” The Times called his statement defensive and, not too shockingly, reported on it but did not provide a link.)

More generally, there was healthy skepticism that the scheme would work as advertized. Million Dollar Journey unconvincingly claimed to be taking a wait-and-see attitude and Weakonomics unkindly mentioned that bank stocks went down sharply on the announcement.

Newspapers came out the next day with stories about the many homeowners that could use help but are not covered by the plans. The Wall Street Journal had a rundown of half a dozen worthy cases that fall outside the guidelines. The Times almost did the same thing, but led with a picture of a man standing in front of an imposing and ugly edifice in what the Times identified as a desirable section of Dublin, California. The poor fellow bought the house for $2.24 Million and it is now worth half that. In case readers in Middle America waivered in their sympathies, the Times also mentioned that the owner, a first-generation Arab-American, was a luxury used car dealer.

There was a telling detail buried in the Treasury’s materials that went, as far as I can tell, unreported. Mortgage servicers are required to estimate if the mortgage owner’s profit would be maximized leaving a given mortgage as is, and possibly foreclosing, or offering the borrower a deal under the modification program. If the owner is better off doing nothing, the servicer may do so, but if it is better off offering a modification the servicer must enter the mortgage into the program. While it is reassuring that the administration does not expect mortgage owners to enter the program if doing so would cost them money, it is more than a little curious that they would make it a requirement that they do so if it is in their own best interest. Moreover, it is not clear how anything can be required of anybody. This is, after all, merely a set of guidelines promulgated by the Treasury Department, not a law enacted by Congress.

The answer, I think, is that this is a forlorn effort to empower mortgage servicers to do more than they are legally allowed to do. A servicer is just that, a company hired to collect the monthly checks, send out statements, and occasionally deal with certain contingencies in circumscribed ways. They do not own the mortgage and, indeed, because many mortgages are packaged inside CDOs, who owns the mortgage can be a difficult question to answer. (See nice picture here.) By having the servicer demonstrate that the owner of the mortgage (whoever that is) is better off under the program, and by requiring (whatever that means) the servicer to then enter it into the program, the Treasury hopes to give the servicer enough moral cover to brave the problem that they may not legally be allowed to do what the Treasury wants them to do.

Mortgage Bankers Association President John Courson said that the Obama program, by setting an industry standard, will help servicers, who are hired by investors to collect mortgage payments each month, defend themselves against complaints that they aren’t acting in investors’ interests by modifying loans. But Mr. Courson added that servicers might be reluctant to act without congressional protection from lawsuits.

In this context, when a lobbyist says “might be reluctant to act” he means “won’t do a damn thing.” And so is laid bare the fundamental structural problem with modifying mortgages, a problem the administration cannot solve, even for $75 billion.

The mainstream media appears to be having an Emperor’s New Clothes Moment with regard to the housing bailout. True enthusiasm for it is rare. Some think it goes too far, giving taxpayer dollars to the undeserving, others think not far enough, leaving behind too many homeowners in trouble. And some practical details seem ill-conceived. Yet nobody appears willing to say out loud that this plan is a mess that is unlikely to accomplish what is asked of it. It is as if observers so desperately want the plan to work that they are circumspect in their criticism, hoping that they are the only ones who see the flaws. If only wishing made it so.

1 Comment

Pretty part of content. I simply stumbled upon your site and in accession capital to assert that I get actually enjoyed account your blog
posts. Anyway I’ll be subscribing to your augment and even I fulfillment you get admission to consistently rapidly.

Disclaimer

All advice in this blog is guaranteed to be worth at least what you paid for it, or double your money back. All persons dealing with matters of personal finance are advised to gather information from blogs, books, radio and TV, consult with professionals, discuss the matter with anybody who will listen, and then make their own decision. Because it’s their money.